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Explanation Bond Issue Price

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Explanation Bond Issue Price

1. 1. Explanation of the bond’s issue price<br />(resource: chapter 14 book ‘Fundamental Accounting Principles’, by Wild, Shaw, and Chiapetta, 2009, 19th edition McGrawhill)<br />
2. 2. Definition bond<br />A bond is its issuer’s written promise to pay an amount identified as the par value of the bond and interest at a stated annual rate. <br />
3. 3. Bond Discount or Premium<br />Bond Sets<br />Market Sets<br />ContractRate<br />MarketRate<br />Contract rate > Market rate Bonds sell at Premium<br />Contract rate = Market rate Bonds sell at Par<br />Contract rate < Market rate Bonds sell at Discount<br />
4. 4. Issuing Bonds at Par<br />A company is authorized to issue the following bonds on January 1, 2009:<br />Par Value = \$800,000<br />Stated Interest Rate = 9% (= annual)<br />Interest Dates = 6/30 and 12/31 (= semi-annual)<br />Bond Date = Jan. 1, 2009<br />Maturity Date = Dec. 31, 2028 (20 years)<br />
5. 5. Issuing Bonds at Par<br />On June 30, 2009, to record the first semiannual interest payment is . . .<br />\$800,000 × 9% × ½ year = \$36,000This entry is made every six months until the bonds mature.<br />
6. 6. Issuing Bonds at a Discount<br />Par Value = \$100,000Issue Price = 96.454% of par valueStated Interest Rate = 8%Market Interest Rate = 10%Interest Dates = 6/30 and 12/31Bond Date = Jan. 1, 2009 <br /> Maturity Date = Dec. 31, 2010 (2 years)<br />}<br />Bond will sell at a discount.<br />
7. 7. Issuing Bonds at a Discount<br />On Jan. 1, 2009, the journal entry for the bond issue <br />Contra-Liability<br />Account<br />
8. 8. Issuing Bonds at a Discount<br />Maturity Value<br />Carrying Value<br />Amortizing a Bond DiscountUsing the straight-line method, the discount amortization will be \$887(rounded) every six months. <br />\$3,546 ÷ 4 periods = \$887(rounded)<br />
9. 9. Amortizing a Bond Discount<br />The discount will be amortized over the bond’s lifetime. Every every six months there will be an entry to record the cash interest payment and the amortization of the discount.<br />\$3,546 ÷ 4 periods = \$887 (rounded)<br />\$100,000 × 8% × ½ = \$4,000<br />
10. 10. Amortizing a Bond Discount<br />
11. 11. Issuing Bonds at a Premium<br />Par Value = \$100,000Issue Price = 103.546% of par valueStated Interest Rate = 12%Market Interest Rate = 10%Interest Dates = 6/30 and 12/31Bond Date = Jan. 1, 2009<br /> Maturity Date = Dec. 31, 2010 (2 years)<br />}<br />Bond will sell at a premium.<br />
12. 12. Issuing Bonds at a Premium<br />Journal entry Jan. 1, 2009 for the bond issue <br />Adjunct-Liability<br />Account<br />
13. 13. Issuing Bonds at a Premium<br />Maturity Value<br />Carrying Value<br />Amortizing a Bond PremiumUsing the straight-line method, the premium amortization will be \$887(rounded) every six months. <br />\$3,546 ÷ 4 periods = \$887(rounded)<br />
14. 14. Amortizing a Bond Premium<br />The premium will be amortized over the bond’s life. Every six months there will be a journal entry to record the cash interest payment and the amortization of the discount.<br />\$3,546 ÷ 4 periods = \$887 (rounded)<br />\$100,000 × 12% × ½ = \$6,000<br />
15. 15. Amortizing a Bond Premium<br />
16. 16. Points to remember<br />Compare stated rate with the market rate to determine if the bond issues at par, below par or above par.<br />If the bond issues at par there are only TWO accounts (cash and bonds payable)<br />If the bond issues below par there are THREE accounts (cash, discount and bonds payable)<br />If the bonds issues above par there are THREE accounts (cash, bonds payable, premium)<br />